Is the European Union, as originally conceived, likely to fracture? – part 1.
By Marica Micallef
The possible, even probable, collapse of the European economy would impose significant costs on current European institutions. Is the European Union as originally conceived, likely to fracture?
This could happen in two ways: either the European Union completely disintegrates, or it mutates into something unrecognizable from its original purpose.
What are the factors that might contribute to this disintegration?
Until recently, the EU’s functioning was based on two political pillars that now appear to be collapsing. Primarily, German growth has enabled the joint financing of failing economies (via low-cost debt, the EU budget, and the central banks’ clearing system) without the EU forcing them to commit to politically unpalatable reforms. Beneficial global developments have enabled a focus on economic integration while delaying the much more contentious integration of cultural, social, and foreign policies.
The deterioration of the global economy, combined with EU policies, now threatens industry and living standards in EU member states and limits the scope of joint economic support, which is forcing member states to assess their readiness for potentially drastic reductions in political self-determination. This is most noticeable in Italy.
Given the country’s high indebtedness and low rate of economic growth, the yields on Italian sovereign debt have reached unsustainable levels, breaking through the 4% barrier. Italian debt has an unfavourable maturity structure as well. Italy, for example, had issued only 52% of its external financing needs for 2022 as of the end of June. Furthermore, 35 percent of her outstanding debt will be due in 2024. Within five years, half of its total debt will be due.
Italian debt is unsustainable at current yields without active country-specific support from the European Central Bank (ECB), which the newly introduced Transmission Protection Instrument is designed to facilitate. Disagreements among member states about the wisdom of filling the ECB with Italian bonds are bound to weaken the glue that holds the EU together as it has in the past.